Connecting the New World with the Old World via Commerce and Dialog

China has muscled, conned, bullied, grabbed, extorted, and feigned its way to the top of the global supply chain over the last twenty years.

It took no prisoners—just market share, intellectual property, and liberties in the valuation of its currency. It used a massive trade surplus to buy foreign assets, coralled foreign companies into joint ventures with Chinese firms where they lost their technology to the Chinese partner, and gave away just enough to keep foreigners dreaming—in the spirit of their supposed trade regulations—of their fair share of the huge Chinese market.

With President Donald Trump hosting Chinese leader Xi Jinping at his Mar-a-Lago resort in Palm Beach, Florida, today, many are waiting to see if this dynamic will be fought against. Trump talked tough on China throughout his campaign. Whereas previous administrations tried to engage and dialogue with China—an approach that business groups say has largely failed—this administration pledged to play hardball.

And for good reason, according to a report by the Information Technology and Innovation Foundation (ITIF), a Washington, D.C.-based non-partisan innovation think tank. “China has doubled down on its innovation-mercantilist strategies, seeking global dominance across a wide array of advanced industries that are key to U.S. economic and national security interests,” the report says.

For China, unlike the United States, growth is not the real issue. Rather, growth and economic stability are only important in that they help the Chinese Communist Party (CCP) maintain its grip on the country.

Chinese citizens escaping poverty, and stronger international competition in tech sectors, are good things. But for the CCP, the prosperity of its people is a mere afterthought; the notion of fair trade a curiosity. Its gaze is fixed on its own survival, with all the rest being collaterals, incidentals, and extras.

To quote former United States Trade Representative Charlene Barshefsky, the U.S. “has to rethink the way it engages with China. We have these very fancy dialogues—there’s ninety of them—and I characterize these dialogues with China as the way China manages the U.S., not actually the way the U.S. produces results on the ground for companies and for exporters to China.” Barshefsky spoke during a March 6 event at the Council on Foreign Relations in New York.

And so China has gorged on the markets with little in its way but some timid bilateral discussions, difficult-to-enforce World Trade Organization rules, and a Western alliance in disarray.

Is There a Sheriff in Town?

On both sides of the pro- and anti-trade spectrum, most experts seem to agree China can’t be left unchecked for another decade. It is now to be seen how the United States is going to play its role in the global trade community, while dealing with the rampage of often hostile Chinese investments in sensitive U.S. markets, the towering trade imbalance, and the ongoing signs of currency manipulation (though China has shifted from undervaluing the RMB to propping it up.)

So far, no real effort has been made to stop Beijing on its looting spree, whether that be forcing technological transfer from Western companies that want market access, or straight up theft in the form of cyber espionage. Facing this reality, the patience of the United States in waiting for China to “learn to behave” has been baffling. In 2016 alone, 27 countries brought 119 trade sanctions against China. The previous U.S. administrations however, which saw China eat away at the U.S. market share across a myriad of sectors ever since China’s WTO ascension in 2001, remained mostly mute.

The March 16 report by ITIF points out the inherent weakness of WTO rules that have been negotiated between 160 countries: if one player lacks the goodwill to respect the rules, little can be done to enforce them. The ITIF sees a larger role to be played by domestic legislatures when inking deals with China.

But while the tools to act against China’s “innovation mercantilism” might not have been perfect, both WTO provisions and domestic U.S. regulations have in fact been in place all along. The question remains why they have never been put to use.

For example, citing concerns about surges of imports at the time of China’s WTO ascension, Barshefsky recalled that the U.S. “inserted a China-only provision which lasted twelve years … to allow the president to unilaterally stop imports in any given sector if those imports were disruptive to the U.S.” She added: “The relief was provided only once.”

Barshefsky made the point that “there was concern there would be job loss; there was a specific mechanism to deal with it. It wasn’t used.” The 12 year provision she referred to has recently expired, so new mechanisms will need to be worked out.

Her colleague Edward Aiden, a Bernard L. Schwartz senior fellow at the pro-trade foreign relations think tank CFR, on his side called the failing of previous administrations to trigger the 1988 Foreign Trade Act “a political disaster.” The Act stipulates that if a country is found to be manipulating its currency, intense negotiations are to be started, followed by sanctions if the negotiations fail.

This points to the bigger role the United States could play in global market regulation.

Under the banner of “Constructive, Alliance-backed Confrontation,” the ITIF argues that the United States, as the world’s biggest player, should gather its allies—such as Australia, Canada, Germany, the European Union, the United Kingdom, Japan, and South Korea—and form a front against China.

It further calls for much stronger cooperation between the U.S. private and public sectors to fight abuses, a more “focused, targeted, centralized” approach by giving more control to the federal government, and more resources to the U.S. Trade Commission.

Of the Carrot and the Stick

Since the new administration took the reins, the first concrete signs of the course it would steer regarding trade was stepping out of the Trans-Pacific Trade Partnership (TTP), a deal between 12 countries on both sides of the pacific.

China was implicitly excluded from the deal by technical means, and would have been at a disadvantage in region as a result. If it wanted in, it would have had to play by the rules and meet certain rigorous administrative, labor, environmental and other standards.

If China managed to get into the TTP, however, it would likely would have been another fiasco on par with China’s ascension into the WTO. If history teaches us anything, international trade deals for China are simply opportunities to take advantage and bend the rules.

There are practical limitations on compliance monitoring and enforcement of such deals, and the Chinese regime is expert at navigating such loopholes. The U.S. Chamber of Commerce in a recent report on China’s industrial policy “Made in China 2025: Global Ambitions Built on Local Protections,” makes this extremely clear.

“Many of the challenges associated with China’s industrial policies—for example, government procurement, subsidies, data, licensing, and national security—would unlikely be effectively addressed through an investment treaty or agreement given the architectural limitations of such agreements.”

Now with the TTP carrot gone, it remains to be seen if the Trump administration is prepared to use the stick.

Whatever the case, Peter Navarro, economic advisor to the Trump administration, has not been mincing words so far when it comes to China. Taking the stage at a business conference, Navarro hinted at a much bolder stance toward China’s trade imbalance and currency manipulation.

Referring to China’s worrisome access to sensitive segments of the U.S. market, he said, “Suppose that it’s not a benign ally buying our companies, our technologies, our farmland, and our food supply chain, and ultimately controlling much of our defense industrial base. Rather, it is a rapidly militarizing strategic rival intent on hegemony in Asia and of course world hegemony”.

If the United States can rally its partners behind a renewed, no-nonsense, results-based trade system that doesn’t rely on trusting China’s promises, Beijing’s brazenness may finally be contained, and stability returned to global trade.